Is the moment right to bring back a usury cap? (AFFIL Week)

Triple-digit interest rates used to be illegal. From Biblical times through the Middle Ages through English colonial law, people realized that the government needed to regulate the inherently unequal relationship between lender and borrower. One by-gone civilization that didn’t do this was ancient Greece, and they ended up with loads of literal “debt slaves.” Not exactly an enviable outcome.

In today’s small loan market, plenty of people borrow money at triple-digit interest rates. These rates show up in payday, car title, overdraft, and refund anticipation loans. Capping interest rates across the nation is a simple way of preventing this from happening and saving people lots of money, but that option was politically impossible for a long time. Now, that may be changing.In his campaign materials, President Obama talked about instating a 36% interest rate cap on small loans. Senator Durbin (D-IL) introduced legislation to this effect in the last Congress, which AFFIL and many of our partners supported.

Most AFFIL members think interest rates should be capped at 15%, which is way south of 36%. But in today’s crazy world, 36% is what we can realistically hope for as far as a national cap goes.

A 36% cap won’t change most traditional loans like mortgages, credit cards, car loans and student loans. But, it does the trick in eliminating the worst loan products. It’s illegal to lend money at more than 36% to members of the military, which effectively means that there are no payday loans made to members of the military. Similarly, H&R Block has stopped making Refund Anticipation Loans (RALs) to members of the military, because they just aren’t profitable enough to be worth it.

Speaking of RALs, NCLC and CFA recently released their preliminary findings about RALs (PDF link) for tax season 2007, showing that once again, these unnecessary loans drained about $900 million from American families. And again, mostly low-income people received them. The Red Tape Chronicles denounced RALs in this post, particularly in light of bailout money funding the banks making RALs.

The thing about RALs is that most people don’t even know they exist, probably because they are often referred to as “rapid refunds” or “advances.” But fortunately, the California AG just won a lawsuit against H&R Block for these misnomers, and tax preparers now have to call these products “loans.”

Even 48% of AFFIL members had never heard of RALs when we did a quick survey a few weeks ago. After being told what a RAL is, how expensive they are and who they are targeted to, 96% of respondents agreed that Congress should do something to restrict or get rid of predatory RALs. We set up this page on our site for people to send a letter to Congress about RALs.

So, is the tide really turning – is there some momentum to cap interest rates at a reasonable level? Should it turn – is a rate cap a good thing for consumers? If a company can’t make a profit lending beneath 36%, should we question their business model rather than the cap itself?